Debate: 2010 US bank tax

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Is the Obama administration's 2010 bank tax justified?

Background and Context of Debate:

The tax, named by the Obama administration as the "financial crisis responsibility fee", would raise up to $117 billion over the next 12 years. The idea is to repay the taxpayer money spent in the TARP fund (Troubled Asset Relief Fund) to bailout the banking and financial system.

The tax will effect 50 banks and insurers with assets of more than $50 billion - 35 American institutions and 15 or so domestic subsidiaries of foreign firms. Each bank will pay 0.15% of its eligible liabilities, which is measured as total assets minus capital and deposits (or, for insurers, policy reserves). Investment banks with few deposits, such as Goldman Sachs and Morgan Stanley, will be hit much harder than commercial banks. President Obama defended the tax, saying in January of 2010, "My commitment is to recover every single dime the American people are owed. And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people...We want our money back, and we're going to get it."[1] The proposal was met with widespread debate among lawmakers, lobbyists, opinion writers, and international figures, the arguments of which are documented below.

Taxpayer money: Is tax justified to re-coup taxpayer bailouts?

Pro

It is justified to repay the debt The U.S government used taxpayer's money to bail out these rampaging banks. Although the banks are vital parts of the U.S economy, they nevertheless needs to repay their debt to the common people, for they owe their very existence as a result of the U.S government bailing them out. Since they borrowed money from the U.S government, it's justified for the U.S government to get that money back, and to give the money to the taxpayers as a show of gratitude.It's that simple.

Bank tax recoups profits made on backs of taxpayersSimon Nixon. "Windfalls Show That Bonus Tax Makes Sense." Wall Street Journal. October 20, 2009: "A windfall tax is blunt, arbitrary and something supporters of free markets usually instinctively avoid. Even so, following news that Goldman Sachs Group has already set aside a $16.7 billion bonus pool for 2009, the case for windfall taxes on banks that pay giant bonuses is becoming unanswerable. [...] This year's bank profits are windfalls in the purest sense. They aren't the due rewards for exceptional skill but gifts from taxpayers. Many banks are earning huge, risk-free profits borrowing from central banks at ultralow interest rates and lending back to governments at much-higher rates. If this giant, hidden subsidy was being used to support new lending, fair enough. Instead, it looks destined for bankers' pockets."

Banks are unlikely to pass tax on to consumers The argument here is that the 50 largest banks are unlikely to want to raise prices in the faces of competition from smaller banks that are not subject to the tax. An additional argument along these lines is that banks are not going to want to make the politically unpalatable move of raising prices while paying out major bonuses to themselves.

Con

2010 bank tax is pure populism Republican National Committee Chairman Mel Martinez said on January 15, 2010: "The basis for [the bank tax] is populism. It’s very popular to whack the banks and talk about bonuses and get every dime paid back even though it’s already happening."[2]

Deficit reduction: Will a bank tax help reduce the deficit?

Pro

Bank tax will help reduce large US deficit French Finance Minister Christine Lagarde said on January 15, 2010 that U.S. President Barack Obama was justified to propose a bank tax: "[U.S. banks] have dug a $117 billion hole and President Obama is justifiably saying he wants that hole plugged."[3]

Stability: Will a bank tax help stabilize the economy?

Pro

Bank tax counter-acts expansionary effect of bailout"The Bank Tax." Gregory Mankiw Blog. January 15, 2010: "One thing we have learned over the past couple years is that Washington is not going to let large financial institutions fail. The bailouts of the past will surely lead people to expect bailouts in the future. Bailouts are a specific type of subsidy--a contingent subsidy, but a subsidy nonetheless. [...] In the presence of a government subsidy, firms tend to over-expand beyond the point of economic efficiency. In particular, the expectation of a bailout when things go wrong will lead large financial institutions to grow too much and take on too much risk. [...] we can offset the effects of the subsidy with a tax. If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts."

Con

Bank tax will not reduce risk-taking at banks"Bank tax won't solve problems." Denver Post Editorial. January 14, 2010: "we question whether it will be structured fairly and if it truly will discourage the kinds of risky behavior that led to the financial crisis — and if that's even the proper role of this particular tax [...] Isn't it the role of regulation to expose and even prevent the use of the crazy derivatives that led to the recent credit crisis? It's clear that during this last crisis the markets were incapable of assessing the risk that financial institutions were taking. [...] Greater transparency and reporting requirements would give the markets the ability to analyze risks and set value accordingly. [...] We'd like to see more progress on those fronts rather than assessing taxes that very well could be passed on to consumers and shareholders."

2010 bank tax puts US banks at disadvantage globally Republican National Committee Chairman Mel Martinez said after the announcement of the tax in January of 2010: "This is a significant 10-year tax which may put U.S. banks at a very disadvantageous position in terms of world competition. This is not just for the bonuses this year."[4]

Jobs: Will a bank tax help or hurt job creation?

Pro

Bank tax is not too great of a burden on banksPeter Eavis. "Obama's gentle bank tax." Wall Street Journal. January 14, 2010: "Will Obama's bank tax be that taxing for the banks? [...] Let's say the administration wants to raise about $100 billion over 10 years by taxing market debt. Paying out $10 billion a year is no sweat for an industry that, according to Goldman Sachs, made $250 billion in earnings before taxes and loan-loss provisions last year. And it won't drive up their funding costs by much. Goldman estimates $5.5 trillion of nondeposit liabilities at large banks. To get to $100 billion in 10 years on that sum would mean the banks paying a manageable 0.2 percentage point extra a year."

Con

2010 US bank tax will kill jobs created/fostered by banks Massachusetts state senator and US Senate candidate Scott Brown told the Wall Street Journal on January 15, 2010 in response to the bank tax: "opposed to higher taxes, especially in the midst of a severe recession. [...] Raising taxes will kill jobs."[5]